Commentaries

2018 Year End Review

Just as the third quarter
behaved in the opposite manner as is normally experienced (positively), the
fourth quarter proved to be the exact opposite as is normally seen. It will go
into the record books as one of the worst fourth quarters, and December will be
represented by its worst performance since 1931. Equity markets went into their
fifth correction of the year in October,
then settled into a trading range for all of November and the first half
of December. The last two weeks of December, equities fell sharply into the
Christmas break, effectively erasing all of their gains for the year.

Performance Numbers For
The Fourth Quarter Were Broadly Lower

During the fourth quarter,
the S&P 500 Index fell -13.52%, the S&P MidCap 400 Index fell -17.28%,
and the S&P 600 Small Cap Index fell -20.10%. The hardest hit sector was
energy, as oil prices declined -44.91% from October 3rd to December
24th. The S&P Composite 1500 Energy Sector Index fell -25.41% in
the quarter. Other notable declines included the Dow Jones Transportation
Average, down -19.09%, the S&P Composite 1500 Industrials Sector Index,
down 17.77%, and the S&P Composite 1500 Information Technology Sector
Index, down -17.33%. Relative strength was found in the defensive sectors. The
S&P Composite 1500 Consumer Staples Sector Index fell -5.47%, the S&P
Composite 1500 Health Care Sector fell -9.60%, and the Dow Jones US Real Estate
Index fell -5.97%. The strongest equity sector was utilities, as shown by the
Dow Jones Utilities Average, down -0.24%. For the year, only health care,
internet, and utilities sectors managed to remain positive.

International Equities Also Had A Rough Quarter.

The MSCI World Index
excluding the U.S., fell -12.78% in the fourth quarter, ending the year at -14.09%. The Russell Europe Index fell -13.22% in the
quarter, and finished -15.04% YTD. The Russell Emerging Markets Index fell -7.18%
in the third quarter to end at -14.54% YTD. The Russell Latin America Index
gained +0.91 in the quarter, and finished down -7.14% for the year. Tariff
talks had been experiencing progress, with Canada and Mexico signed on, Europe
in negotiations, and China agreeing on no more new tariffs for six months
during continued talks. As with U.S. equity markets, the weakness in the fourth
quarter appeared to be more technical then fundamental, with rapid-trade
computer selling taking control late in the year.

Bond Markets Were Marginal Beneficiaries Of The
Declines In Equities

The Bloomberg Barclays U.S.
Aggregate Bond Index rose +1.64% in the fourth quarter to finish +0.01% for the
year, including dividends. The Bloomberg Barclays Municipal Bond Index rose
+1.69%, finished the year and +1.28%. The Bloomberg Barclays Global Aggregate
Bond Index rose +1.20% in the quarter and finished -1.20% YTD. The Bloomberg
Barclays U.S. Corporate High Yield Bond Index fell -4.53% in the fourth quarter
and finished -2.08% YTD. The Bloomberg Barclays 1-3 Month T-Bill Index rose +0.56%
in the quarter, to close the year with a gain of +1.82%.

The Conundrum

The most surprising aspect of
the fourth quarter equity declines was they occurred in the virtual absence of
negative fundamentals. The nation’s economic health remained strong with third
quarter GDP at +3.8%, third quarter corporate earnings beat estimates,
inflation numbers remained low, and unemployment numbers were increasingly
positive. The suddenness and severity of the market declines bore all the earmarks
of high frequency trading. High frequency trading first appeared in 2010, has
proven difficult to regulate and control, and can significantly disrupt
markets. Ultimately however, fundamentals rule the day, and we expect to see
this reflected in the new year.